For many small business owners, the move from independent hobbyist to actual business owner can be a tricky maze of business jargon, tax law, and unqualified advice. Yes, there are some tricky bits depending on how you file small business taxes with your state, but for the most part, you won’t need a legal team backing you in order to become a small business.
This is the most basic form of small business entity. More or less, you file your papers and then you are considered a small business. Oftentimes, you have to also file a DBA (doing business as) if you want to operate your small business under a different name than your own. As a sole proprietor, you are liable for all of your business’s dealings, money, and loans – which means that banks can take any of your property if your business fails to pay a loan.
Filing taxes is a bit easier as you simply track all of your business expenses and file under your personal tax return. You should still seek the help of a CPA in order to get your tax return filed appropriately because, again, you are liable for whatever your business does.
That business idea that you and your friend hatched in college that is starting to take off? That could be a jointly owned business. This means that you are both liable for the business, which is great if you trust your business partner, but wretched if you don’t. If they take out a loan under the name of the business – even without your knowledge – you are still considered liable for that loan even if they skip town, go off the grid, and hide from you.
Taxes are filed just the same as in a solely owned business, but, and again, you should consult with a CPA in order to ensure that you and your business partner are filing your taxes accurately.
Limited Liability Company
This business filing is a bit newer, a touch more complicated than sole or joint ownership, but can be huge when it comes to separating yourself from your business. Basically, by filing as an LLC, you are removing any personal liability from your business. Default on a loan as a business entity? Rack up a huge amount of credit card debt as an LLC? Good news – despite the terrible financial hole your business is in – the banks cannot come after your personal belongings!
This does mean filing separate taxes for your business, but the amount of security that this can mean is worth the added level of detail that you have to go into with your taxes every quarter. Again, having a CPA in your court is essential to make sure that you keep the IRS off your back.
C and S Corps
Typically, if you are just starting out your small business, you are not looking to incorporate, but we will touch on these briefly. Basically, a C Corp means that you are taxed twice: once for the business’ profits and then again on any income you receive, whereas an S Corp means that your business’ profits are passed on to shareholders and those profits are, in turn, taxed.